Sprint’s Potential Bid For T-Mobile Could Make For A Risky Merger

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Sprint (NYSE:S) is considering a merger with T-Mobile and could place a bid as soon as the first half of next year, according to a recent Wall Street Journal report. [1] Depending on the stake that Sprint wants to acquire in T-Mobile, the deal could cost more than $20 billion and add to Sprint’s ever-burgeoning debt load. It would also require a complicated merger of different network bands and technologies, made all the more risky by the fact that Sprint is currently undertaking an expensive network modernization drive of its own that includes the integration of Clearwire’s spectrum.

Backed by Softbank, the third-largest U.S. wireless carrier has looked to be aggressive in a bid to better compete with the behemoths Verizon (NYSE:VZ) and AT&T (NYSE:T). Sprint had earlier competed with Dish in a bidding war  to acquire the rest of Clearwire, with whose spectrum it is building an enhanced LTE network that could deliver 4G speeds well in excess of rivals. By potentially acquiring T-Mobile, Sprint could be looking to create a more formidable third rival in a somewhat duopolistic industry.

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Regulatory concerns

Sprint’s efforts at a deal could face tough opposition from antitrust regulators, who might fret over having one less national carrier and therefore less competition in the industry. Two years ago, a similar bid for T-Mobile by AT&T was abandoned due to anti-competitive concerns from the FCC as well as the Justice Department. A merger of the third and fourth largest wireless carriers may not evoke regulatory skepticism of a similar kind, but T-Mobile will be wary of risking more distraction on another potentially futile buyout attempt this time around. However, Deutsche Telekom, which owns 67% of T-Mobile, has been looking to exit the U.S. market and might entertain a bid if regulatory bodies take a more lenient view of the transaction.

Together, AT&T and Verizon control about two-thirds of the overall U.S. wireless market currently. In the postpaid segment, their combined market share is even higher at about 73%. Merging Sprint and T-Mobile could form an entity with over 51.4 million postpaid subscribers, or about 23% of the market – which doesn’t seem large enough to raise regulatory concerns. On the other hand, the 100-million strong prepaid segment, where Sprint and T-Mobile are bigger players with a combined share of over 30%, may attract regulatory scrutiny. [2] However, considering that the U.S. prepaid wireless market is about half the size of postpaid and that Sprint and T-Mobile exert nowhere close to the kind of dominance that Verizon and AT&T have in postpaid, regulators may not be as critical. In fact, having a third-placed carrier with the scale to compete more effectively with the duopoly may be beneficial for the long-term sustainability of the industry.

However, T-Mobile has recently shown signs of turning the corner, with back-to-back quarters of subscriber gains after close to four years of sustained losses. The company’s aggressive ‘Uncarrier’ campaign and its recent deal with Apple to carry the iPhone have proved immensely successful in righting the ship. T-Mobile has also raced ahead of Sprint in LTE coverage despite beginning its network deployment much later, which has worsened Sprint’s postpaid losses in recent quarters. With T-Mobile regaining its footing, antitrust authorities may see the deal as Sprint’s attempt to take out a competitor that is starting to be disruptive to its plans.

Network complexity

More than the regulatory hurdles, however, Sprint’s shareholders should be concerned about the kind of operational complexities that the carrier would have to face in merging and managing different networks. Sprint currently provides CDMA and FDD-LTE services on 800 MHz and 1900 MHz spectrum, and is building out a faster TD-LTE network using the recently acquired 2.5 GHz spectrum from Clearwire. Meanwhile, T-Mobile is using the 1700 MHz AWS band for LTE and 1900 MHz for HSPA+ services. Acquiring T-Mobile will require Sprint to perform the complicated task of merging these different network technologies and spectrum bands, made all the more complicated by the fact that the carrier will need to secure handsets that can access all the different bands to make the deal work.

Despite all the regulatory and operational risks associated with the deal, a possible motivation for Sprint to go ahead with a T-Mobile merger could be the emergence of Dish as a potential long-term competitor at the national level. Dish has been aggressively posturing itself as a potential wireless industry entrant, with bids lined up for H-block spectrum and LightSquared’s troubled spectrum assets. This adds to the 40MHz S-band wireless spectrum that Dish acquired from TerreStar Networks and DBSD North America last year. With Dish’s spectrum assets growing, Sprint may be looking to thwart any attempt by Dish to acquire T-Mobile down the road and become a stronger fourth rival.

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Notes:
  1. Sprint Working on a Bid for T-Mobile, WSJ, December 13th, 2013 []
  2. US Mobile Data Market Update Q2 2012, Chetan Sharma Consulting []
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